Today‚Äôs announcement of new swap facilities with the FRB and BOJ (JY10trln), ECB (EUR80bln), BOE (GBP30bln) and SNB (CHF40bln) or roughly US$300bln in foreign currency is not benign‚Ä¶at the very least it is a strong message that a weaker dollar is not a serious risk ahead for foreign creditors to the US. And this question played big ahead of and during G20 last week -- China and Russia explicitly and Europe implicitly (excluding the Czech government tirade).

With $300bln in foreign currency US authorities now have substantial new access to foreign currency to sell to the market in currency intervention or lend to the banking system in money market operations through the end of October (look for these facilities to be rolled) to meet any significant demand from the market and or banking system for foreign currency in the period ahead. Keep in mind that the Fed has large swap lines now with foreign central banks which could also be used to support dollar needs in the financial markets. But since these are drawn on by foreign central banks with dollars lent to local banks, we assume the Fed is not comfortable drawing on the foreign currency while the US dollars are outstanding with foreign central banks and their clients, local banks. So we have two swap facilities -- one that is for foreign central banks to lend dollars to local banks and one that is for the Fed in the event there is a need to defend the dollar or meet a dollar surplus (foreign currency shortage).

With more thought and conversations, my initial take that some hole needs to be filled in US financial system (non-bank financial or bank) is not very likely. There would be signs of any dislocations in the credit markets of a foreign currency shortage if so and this is simply not in evidence. Keep in mind credit markets were blaring signs of stress in global capital markets last fall related in part to a US dollar funding shortage (the currency of origination for credit derivatives).

Why does the Fed need to show the world it has some deep pockets if there is a need ahead to support the dollar? Keep in mind the Fed and Treasury have around $75bln in foreign currency, gold and SDRs (and very small USD deposits) with about $45bln in mostly euros and yen. In today‚Äôs age of available currency reserves the Fed and Treasury looked under gunned, especially if you are from China. And the US international reserves are complicated by difficulties resulting from the US Treasury committing its Exchange Stabilization Fund to the insurance program supporting money market accounts set up last year. And gold reserves are messy -- need another arm of government to sell (valued at $42 an ounce for $11bln in total -- no mark-to-market accounting here - at today‚Äôs price US gold reserves are $220bln).

So today‚Äôs news in hindsight appears more benign than my initial take (some unreported new hole to fill that the stress test or AIG books revealed). However, the news is a significant pro-dollar development and is clearly aimed at assuring the largest foreign creditors t the US like China that mechanisms are in place that could be used to fund a massive dollar support operation. In other words the US monetary authorities are saying there will be no dollar failure ahead much as there will be no large failure of a major financial institution. Does this mean the US won‚Äôt tolerate a weaker USD ahead? No. What it does mean is there will be tolerance for orderly movements up and down in the dollar, but there will not be much tolerance for any systemically important declines in the US currency. No doubt these facilities come days after G20 and reflect an attempt by key players to address the worry of some members over the USD ahead.

I do think the measure adds some flesh and meat to the bones of a strong dollar policy‚Ä¶There is now a much bigger safety net in place.

Lastly, the history of swap lines with the Fed goes back to the Carter admin when there was a serious effort to support the dollar (even sold gold to buy dollars) and hung around through most of the 1990‚Äôs (used with Mexico during the Tequila Crisis). But by the late 1990‚Äôs they were seen as relics and instead of being automatically renewed most swap arrangements the Fed had with foreign central banks were allowed to mature. Clearly their reemergence September 18, 2008 in a large way is another way of saying that capital markets left to their own are not always rational allocation machines and having more in place to allow government to smooth volatility is necessary‚Ä¶long live neo-classical economics on a policy level and welcome back neo-Keynesian economics.

David Gilmore

Press releases from today and September 18, 2008.

Today‚Äôs press releases from the Fed and ECB (identical) and followed by press releases from September 18, 2008 when currency swaps were first announced to cope with a dollar funding need. Today‚Äôs language is very much about a US foreign currency funding need. What that need is is unclear.

For release at 10:00 a.m. EDT

The Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank announce swap arrangements

The Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing swap arrangements that would enable the provision of foreign currency liquidity by the Federal Reserve to U.S. financial institutions. Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap agreements with the relevant central banks. Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.

Federal Reserve ActionsThe Federal Open Market Committee has authorized new temporary reciprocal currency arrangements (foreign currency liquidity swap lines) with the Bank of England, the ECB, the Bank of Japan, and the Swiss National Bank. If drawn upon, these arrangements would support operations by the Federal Reserve to provide liquidity in sterling in amounts of up to ¬£30 billion, in euro in amounts of up to EUR80 billion, in yen in amounts of up to ¬•10 trillion, and in Swiss francs in amounts of up to CHF40 billion.

These foreign currency liquidity swap lines have been authorized through October 30, 2009.

PRESS RELEASE

6 April 2009 - Central banks announce expanded swap arrangements

The Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing swap arrangements that would enable the provision of foreign currency liquidity by the Federal Reserve to US financial institutions. Should the need arise, euro, yen, sterling and Swiss francs would be provided to the Federal Reserve via these additional swap agreements with the relevant central banks. Central banks continue to work together and are taking steps as appropriate to foster stability in global financial markets.

ECB decisions

The Governing Council of the ECB has decided to establish a temporary reciprocal currency arrangement (swap line) with the Federal Reserve. This agreement will provide the Federal Reserve with the capacity to offer liquidity of up to EUR 80 billion. The Governing Council approved this swap line until 30 October 2009.

Release Date: September 18, 2008

For release at 3:00 a.m. EDT

Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.

Federal Reserve ActionsThe Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks.

The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion.

In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada.

All of these reciprocal currency arrangements have been authorized through January 30, 2009.

ECB Sept 18 press release

18 September 2008 - Measures designed to address elevated pressures in the short-term US dollar funding markets

Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan and the Swiss National Bank are announcing co-ordinated measures designed to address the continued elevated pressures in short-term US dollar funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.

ECB Decisions

The Governing Council of the ECB has decided to reinforce its joint action with the Federal Reserve by adding an overnight maturity to its operations providing US dollar funding to Eurosystem counterparties and by increasing the amounts offered in the Term Auction Facility operations.

As regards the overnight US dollar funding, the Eurosystem shall conduct US dollar liquidity-providing operations with its counterparties against Eurosystem-eligible collateral, applying a variable rate tender procedure. It is intended to continue the provision of US dollar liquidity for as long as needed in view of the prevailing market conditions. The US dollars will be provided by the Federal Reserve to the ECB, up to USD 40 billion by means of a temporary reciprocal currency arrangement (swap line). The operational details can be obtained from the ECB's website (www.ecb.europa.eu).

As regards the Term Auction Facility operations, the Governing Council of the ECB has decided, in conjunction with the Federal Reserve, to increase the amount of US dollar liquidity provided to the counterparties of the Eurosystem to USD 25 billion for the 28-days maturity operations, and to USD 15 billion for the 84-days maturity operations.

Overall, the dollar funding operations conducted by the Eurosystem could reach an outstanding amount of USD 110 billion, compared to the current USD 50 billion.

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